Question

Blossom Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.85 million for land and $9.15 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.20 million, which is $2.20 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.85 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.).

Should this project be accepted??

Answer 1

Annual cash flows				1.85	Million
Annuity PVF at 9% for 10yrs				6.41766
Present value of inflows				11.87267	Million
After tax salvage present value
Salvagee value			5.2
Less: tax on gain (2.20*35%)			0.77
Net salvage			4.43
Multiply: PVF at 10th yr			0.422411	1.871281	Million
Present value of inflows				13.74395	Million
Less: Initial investment				12	Million
Net Present value				1.743952	Million
NPV = 1.744 milion
Yes, Project must be accepted